MF Global accord, once thought unlikely, goes before U.S. judge

January 30, 2013|Nick Brown | Reuters

(Brendan McDermid Reuters, )

NEW YORK (Reuters) - A year ago, the bankruptcy of MF Global, the collapsed brokerage run by former New Jersey Governor Jon Corzine, seemed like it would be a long and messy affair involving plenty of courtroom drama around the world.

But that was before a surprising meeting of minds between court-appointed administrators in the United States and Britain, and the cooperation of Louis Freeh, former director of the FBI, who is the trustee representing MF Global's creditors.

That led to a proposed settlement, expected to get a judge's sign-off on Thursday, that would give MF Global's U.S. customers 93 percent of their money back - a figure many thought unlikely when the meltdown happened in October 2011.

When MF Global collapsed, regulators found an estimated $1.6 billion hole in customer accounts at its U.S. broker-dealer unit and determined the money had been improperly used to cover corporate needs.

Most of the firm's assets were scattered in subsidiaries around the globe. That resulted in billions of dollars in legal claims between the company's entities, with the interests of broker-dealer customers competing with those of the bankrupt parent's financial creditors.

The bankruptcy world was still immersed in the collapse of Lehman Brothers, which was in the third year of its epic Chapter 11 and today remains embroiled in a slew of lawsuits. While its capital structure was larger and more complex than MF's, Lehman nonetheless painted a clear picture of how complex, transatlantic bankruptcies can devolve into years of litigation.

TRANSATLANTIC FACE OFF

In December 2011, James Giddens, the trustee representing U.S. customers of MF's broker-dealer, knew he might have a lengthy court battle on his hands.

About $700 million of customer money was tied up in MF Gobal's British unit and Giddens believed it belonged to U.S. customers. The money was associated with the accounts of U.S. customers who traded on British exchanges and laws in the two countries clashed on how it should be distributed. Giddens, who had also represented brokerage customers in Lehman's wind-down, knew the laws better than most.

Giddens negotiated for a few months with a team from KPMG that was liquidating the British unit, but by April both sides determined they would need a court to hash out the dispute. That month, Giddens asked KPMG to initiate litigation in Britain and a hearing was set for 12 months later, in April 2013.

With customers and creditors clamoring for payback, neither Giddens nor Richard Heis, the KPMG administrator leading the British liquidation, were happy with the schedule.

If nothing else, it gave them an extra year to negotiate.

The turning point came when money for customers began to flow in from other places, sources close to the negotiations said. Giddens reached settlements with exchange regulator CME Group Inc, MF Global's Canadian affiliate, and others. In Britain, Heis recovered money held by financial institutions and, in November, won a court battle with Giddens over the rights to an undisclosed amount in repurchase transactions, further stabilizing funds for the British side.

By around August, the liquidators began to sense a chance for compromise, said Kent Jarrell, a spokesman for Giddens.

With customer recoveries growing, room for compromise on the intercompany disputes became greater, he said.

"We had been in communication regularly, but the momentum picked up dramatically in the late summer and early fall," Jarrell said. "We started to see ways in which the differences between us could be reduced."

But the trustees needed cooperation from Louis Freeh, the trustee for MF's bankrupt parent, who represents its creditors.

Freeh "had filed claims in the UK administration that the administrators believed to be duplicative" of the claims asserted by Giddens, Marcia Goldstein, a partner at Weil Gotshal who helped represent Heis' team, told Reuters.

Heis felt those claims should be resolved as part of the settlement, Goldstein said, and Giddens began talks to bring Freeh into the deal.

When Freeh agreed, the three sides became eager to tie up loose ends by the end of the year. They reached their goal with 10 days to spare, announcing a global accord on December 21 that would return between $500 million and $600 million to the estate of the U.S. broker-dealer for the benefit of customers.

WORK TO DO

While U.S. Bankruptcy judge Martin Glenn is expected to approve the settlement, which would give U.S. customers up to 93 percent of their money back, work remains.

The last few percentage points of customer money are often the hardest to come by, said Chris Dickerson, a bankruptcy lawyer at DLA Piper.

"I think you're going to find, even in this case, that that last little bit could drag on for a while," said Dickerson, who is not involved in the case.